Are High Risk Pools the Best Way to Keep Down Premiums in the Non-Group Insurance Market?

In my previous posting on the ACA, I posited five questions that serious health policy reform should address.  High risk pools form part of a response to the first question:  Who should pay for the predictably expensive (such as those with chronic disease)?

Based on Statistical Brief #497 (SB497)  from the Agency for Healthcare Research and Quality, we know that in 2014, the most expensive 5% of the population accounted for just over half of all health care expenses with a mean expenditure per person of $47,498.  Furthermore, SB497 reveals that for people between the ages of 45 and 64, the average expenditure rises to $62,472.

Of the 12.2 million enrollees in 2017 in the ACA created market exchanges, 3.4 million are aged 55 and older.  If we assume that the 5% most expensive members in this pool have results similar to their peers in the population at large, the ACA would need to arrange for provision of at least $10.5 billion (given the average amount cited for those 45 to 64.)  Inclusion of those below the age of 55, based on enrollment as of January 31, 2017 and the averages cited in SB497, I estimate that over $26 billion would be required to pay for the most expensive 5% of those enrolled in the exchanges.

Some policy makers have proposed separating out the most expensive enrollees into state-based high risk insurance pools, somewhat similar to what existed prior to the ACA. In a February 2017 issue brief, Kaiser Family Foundation analysts characterize the pools that existed in the 35 states that had them in 2011 as follows:

  • 226,615 people were covered nationwide, only 2.2% of non-group enrollment.
  • High risk insurance policies had premiums 50 to 100% higher than non-group market rates.
  • Pre-existing conditions clauses were operative for 6 to 12 months after enrollment.
  • High deductibles and lifetime limits of $1 million to $2 million constrained the payouts.
  • Despite these constraints, the average loss per enrollee in these high risk pools was $5,510; so for all enrollees, the total loss amounted to $1.25 billion.

Clearly, if  neither pre-existing conditions clauses nor limits on payouts were allowed (as under the ACA), and if policy sought to include those in the top 10% or even 5% of enrollees, a significantly, expanded funds would be required.  Pauly and Miller estimate that 2 to 4 million people would not be able to purchase insurance because of pre-existing conditions; others including analysts at KFF estimate that 27% of adults under 65 would be uninsurable.  To cover 3 million high risk enrollees at an average cost of $30,000 per enrollee would require annual funding of $90 billion, well in excess of what Congressional Republicans have proposed in their amendments to the ill-fated American Health Care Act.

In short, guaranteeing acceptable coverage for those who enroll in high risk pools requires substantial subsidies.  Only four choices exist:

  1. Presently, the ACA allows no more than a three-fold difference in premiums;  such differences can only be based on age, with a smaller differentiation allowed between smokers and non-smokers. Our current policy delivers a risk pool dominated by relative older and sicker people.  Younger and healthier people, unless they are of low income, tend not to enroll and instead pay the penalty. In response to this risk pool, insurers have provided policies with high premiums, high deductibles, or narrow networks of medical care providers.
  2. Create one large risk pool through which the young pay less and the older pay more than presently prescribed by the ACA (such as a four or five-fold difference.) On average, premiums would bear a relatively close relationship with fair, actuarial value, and taxpayers would subsidize premiums inversely related to incomes.
  3. Taxpayers subsidize participation in a separated high risk pool. This would reduce the premiums to be paid by others who participate in non-group markets.
  4. Seriously enforce the mandate to purchase insurance as is done in Switzerland, Singapore, and Germany.

Who should pay and how much requires several value judgments? If those judgments include spreading the burden widely across the population and basing payment on ability to pay (income or wealth), then federal income tax revenue would be the “best” choice.

Bottom line:  to ensure acceptable coverage for those with the risk of serious illness, someone else must pay for them, and the amounts involved are far from trivial.  Separate high risk pools represent one of various choices and may or may not be the best approach to ensuring coverage for the predictably expensive portion of the population.

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